IRS Issues Letter Concerning FSA Carryovers and COVID-19 Relief

On June 25, 2021, the IRS released a letter regarding health FSA forfeitures in response to a congressman’s inquiries on behalf of a constituent. The letter reiterates IRS guidance regarding health FSA forfeitures, including recent temporary legislation due to the ongoing COVID-19 public health crisis.

Under the “use-or-lose” rule, health FSA contributions that are not used to reimburse expenses incurred during the plan year (or during a carryover or grace period, if applicable) will be forfeited, even if the reimbursements are less than the participant's contribution. To help reduce forfeitures, a plan can choose to include a carryover or grace period provision (one or the other, but not both). Carryovers are limited to $550 (indexed) that can be carried over into the next plan year and grace periods are limited to extending the period in which claims can be incurred up to two and a half months following the close of the plan year. In addition, an individual whose employment terminates can elect to continue health FSA participation through COBRA coverage.

The letter clarifies that due to temporary relief during plan years 2020 and 2021 (as provided by the CAA and IRS Notice 2021-15), an employer can choose to permit:

• A carryover of any unused amounts from the 2020 and 2021 plan years.
• A grace period (i.e., the period for incurring claims) extension up to 12 months for plan years ending in 2020 and 2021.
• A grace period (i.e., the period for incurring claims) extension up to 12 months for plan years ending in 2020 and 2021.
• Post-termination reimbursements from health FSAs (which would allow an individual to continue to be reimbursed from unused health FSA funds through the end of the plan year in which participation ceased).

The IRS reiterates that any of the above changes are optional for employers. For more detailed information regarding the temporary relief available, see our article from the March 4, 2021, edition of Compliance Corner, "IRS Provides Guidance on CAA Changes to FSAs and DCAPs."

As a reminder, if an employer chooses to implement any relief available, plan amendments are required by the last day of the first calendar year after the end of the plan year in which the amendment is effective.

Although the letter does not provide any new guidance, it serves as a good reminder of the health FSA general rules regarding forfeitures as well as the temporary relief available.

IRS Letter »
IRS Notice 2021-15 »